The yield on the UK 10-year gilt fell below 5.35%, its lowest level in three weeks, as investors weighed stronger-than-expected economic data and the implications for monetary policy. GDP grew by 0.1% in August, following a 0.4% expansion in July, defying forecasts of a contraction. Output rose 0.7% in the three months to August, marking the fourth consecutive month in which growth outpaced expectations.
The economy’s resilience, despite elevated energy prices and higher borrowing costs, has drawn close scrutiny from Bank of England policymakers. Some rate-setters are considering whether a further interest rate increase may be required next month to contain inflation risks stemming from the energy shock linked to the war in Iran.
The data also arrive ahead of Chancellor John Healey’s first budget on October 28. While stronger activity could justify an upgrade to the UK’s growth outlook, higher gilt yields and mounting pressure to support households constrain the government’s fiscal room for manoeuvre.